ISTISNA’

ISTISNA’

 Istisna’a is a contract of sale of specified items to be manufactured (or

constructed), with an obligation on the part of the manufacturer (or
contractor) to deliver them to the Customer upon completion.

 Istisna’a is the second exception to the rules of sale where a sale is

allowed without immediate delivery of the goods sold .
 ISTISNA’

 An Istisna’a contract is permitted only for raw

materials that can be transformed from their
natural state by a manufacturing or construction
process involving labor.

 It is not permissible that the subject matter of an

Istisna’a contract be an existing and identified
capital asset.
 ISTISNA’

 If complete specifications (such as type, kind,

quality and quantity) of the subject matter have
been given to the manufacturer along with the
contract price, then the manufacturer is bound to
manufacture the Asset and cannot terminate the
contract unilaterally.

 The ultimate purchaser cannot be regarded as the

owner of the materials in the possession of the
manufacturer for the purpose of producing the
 ISTISNA’

 The time of delivery of goods does not necessarily

have to be fixed in Istisna’a however, a maximum
time may be agreed upon between the parties.

 The delivery of the subject matter may take place

through constructive possession. At this point, the
liability of the manufacturer in respect of the
subject matter comes to an end and the liability of
the ultimate purchaser begins.
 ISTISNA’

 It is necessary for the validity of Istisna’a that the

price is fixed with the consent of the parties.

 The Istisna’a price can either be paid in advance,

or in installments or at the time of delivery of
goods.

 The price of Istisna’a transactions may vary in

accordance with variations in the delivery date.
 ISTISNA’

 It is permissible to amend the contract price of an

Istisna’a contract upwards or downwards, as a
result of intervening contingencies (Force
Majeure).

 It is permissible if it is agreed between the parties

that in the case of delay in delivery, the price shall
be reduced by a specified amount per day.
 ISTISNA’

 Unlike Murabaha where only raw material can be

financed, Istisna’a’ can be easily utilized to
facilitate payment of overheads etc. in addition to
the purchase of raw material.

 It is also to be noted that amount paid out as

Istisna’a’ price to the manufacturer can be used by
the manufacturer anywhere he deems fit. It doesn’t
have to be utilized exclusively for the production
process.
 Prdouct Structure for ISTISNA’

Sale on Cash Basis

1. After necessary credit and Shariah Approvals, MBL & Customer
will enter into a Master Istisna Agreement to manufacture
goods from time to time at an agreed price.
2. MBL would then enter into an Istisna transaction with the
Customer for the production of specific Goods. At this time
quantity, price, specification and delivery date of Goods will be
agreed. The delivery of goods could be lump sum or in
trenches.
3. MBL could pay the Istisna price to the Customer either in full
or in installments.
4. After manufacturing, the Customer will inform MBL and will
request for acceptance of delivery. A Bank representative will
accept the delivery after physical inspection of the goods at
the site. This delivery could be through identification and
separate storage of MBL goods (so that they are not mixed
 Prdouct Structure for ISTISNA’

5. MBL will also enter into a separate Agency Agreement with

the Customer for sale of goods on Cash basis to credible
buyers on behalf of MBL in a specified number of days. In this
manner the Agent will be responsible for recovery of Sale
price and its payment to MBL.
6. MBL’s ownership and risk in goods remains until the Agent
sells these goods to the Buyer in the market. Takaful may be
obtained to cover this risk.
7. MBL Agent will sell the goods in the market and will pay the
price to MBL.
8. The Agent (Manufacturer) will be entitled to a specified
Agency Fee for providing such services. MBL may also give a
certain incentive to its Agent for timely selling and payment to
MBL.
 Prdouct Structure for ISTISNA’

In case of Credit Sale

 The customer (as Agent of MBL) will sell the goods to

Credible Buyers on Credit (instead of Cash) and collect
the sale proceeds in a specified number of days.

 At the time of entering into Agency Agreement, the

Customer may be asked to provide a separate /
independent Guarantee to guarantee payment
obligations of the potential buyers.
 Prdouct Structure for ISTISNA’

6. Sale Proceeds (net of Agency

Fee)

1. Istisna’a Agreement

Manufactu 2. Delivery of Goods MBL

rer
3. Agency Agreement

5. Sale 4. Sale of
Proceeds Goods

Local
Buyer
 Legal Documentation

The package comprises of the following:

1. Master Istisna’a Agreement

1. Agency Agreement

1. Corporate Guarantee
 Legal Documentation in ISTISNA’

1. Master Istisna’a Agreement

This agreement sets out the terms & conditions upon which
the Bank, from time to time, orders the Customer to
manufacture the Goods

Components :

A. Written Offer for Manufacture of Goods:

Description of Goods including quantity, quality, delivery
date, cost price, place of delivery etc.

B. Goods Receiving Note:

 Legal Documentation in ISTISNA’

2. Agency Agreement

The Bank appoints the manufacturer (customer) its Agent to

sell the manufactured goods.

Components :

A. Notice of Appointment
The Bank authorizes the Agent to sell the Assets
as its undisclosed Agent details of which are
mentioned.

B. Schedule of Agency Fee

 Legal Documentation in ISTISNA’

3. Corporate Guarantee
The Customer guarantees payment obligation of the
ultimate purchasers if they default to make
payment on time
 Risk Mitigation

RISKS MITIGANTS
 

Delay in delivery of goods from  Istisna’a  price  can  be  reduced 

Delivery
1 the  manufacturer  to  MBL  at  on  daily  basis  to  penalize  the 
Risk
maturity manufacturer

MBL  can  terminate  the  Istisna 

The  Manufacturer  may  not  be  agreement  and  demand  the 
Non- able  to  manufacture  the  goods  price  back  from  the 
2 performan during  assigned  time  and  manufacturer.  Alternatively, 
ce refuses  to  carry  on  the  the  price  may  be  paid  by  MBL 
responsibility further. in  installments  after  being 
satisfied with the performance.

The  Manufacturer  delivers 

defected/inferior  goods,  which 
Quality The  manufacturer  can  be 
3 is  realized  by  MBL  only  when 
Risk asked to rectify the defect.
the  ultimate  purchaser  points 
out to that.
 Risk Mitigation

RISKS MITIGANTS

Increased cost will be borne by 
Cost  incurred  by 
Increased manufacturer unless caused by 
manufacturer  turns  out  to  be 
cost of some  force  majeure  events  in 
4 higher than anticipated earlier 
Manufacturin which  case  Istisna  price  may 
causing  manufacturer  to 
g be  increased  with  mutual 
default on performance
consent.

This  may  be  covered  through 

Takaful  of  the  goods  and  by 
The  goods  once  delivered  by  minimizing  the  time  duration 
Manufacturer will be at MBL's  between  acceptance  of 
5 Storage Risk
risk before the same are sold  delivery  under  Istisna  and 
to the ultimate purchaser delivery  to  the  ultimate 
purchaser. The Agent is asked 
to  procure  Takaful  as  part  of 
his services
 Risk Mitigation

RISKS MITIGANTS

The  Customer  (in  its 

Default by The  ultimate  purchaser  independent capacity) may be 
6 ultimate refuses  to  make  payment  on  asked  to  provide  Corporate 
Purchaser time or goes bankrupt. Guarantee  to  guarantee 
payment  obligations  of 
ultimate buyers.
Jazak Allahu Wa Ahsanal Jaza